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Contingent capital, systemically important banks, and the public

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Abstract

This article discusses the impact of contingent capital on the capital structure decisions of systemically important banks and the consequences for the public. In doing so, the existing literature on capital structure decisions involving contingent capital is extended by presuming the risk aversion of all market participants and by considering both the government’s tax income and its expected rescue costs. It is shown that the use of contingent capital theoretically produces a Pareto improvement for both the bank and the public. However, the subsequent discussion of possible obstacles reveals that such solutions may be difficult to implement in the real world. This is mainly due to the low market liquidity of contingent convertibles (CoCos), insufficient transparency, and non-optimal taxation.

Suggested Citation

  • Bürgi, Markus P.H., 2013. "Contingent capital, systemically important banks, and the public," Journal of Financial Transformation, Capco Institute, vol. 36, pages 77-92.
    • Handle: RePEc:ris:jofitr:1546
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    More about this item

    Keywords

    contingent capital; systemically important bank; SBI; capital structure decision;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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